Economic Effects of Low Population Growth Rates

Written by shane hall
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This article examines the economic consequences of low population growth rates, with particular attention to the European Union, where the problem is greatest. The article examines three main consequences of low population growth as well as public policy responses.

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Introduction and History

Population growth and the economic consequences thereof have concerned economists since the discipline's earliest days. In the pre-industrial 18th century, economists such as Thomas Robert Malthus saw dire consequences, including famine, war, and widespread death, as consequences of overpopulation. Economics has long been known as "the dismal science," thanks in no small part to Malthus' gloomy forecast.

Today's economists are concerned with the economic consequences of low population growth. A key measure of population growth for demographers and economists is the total fertility rate, or TFR. This measure is simply the average number of children that a woman would have in her childbearing years. A TFR of 2.1 (or 2.1 children per woman of childbearing age) is considered the replacement rate, the level at which births and deaths even out, resulting in a stable population. A TFR below the replacement level is considered low population growth.

The Problem Today

At present, the TFR in the United States is slightly above 2, just short of the replacement rate. In the European Union, TFR is much lower, averaging about 1.5, according to population studies at Penn State University. Because of this low TFR, much of the concern about the economic consequences of low population growth has focused on Europe. The Rand Corp. studied low population growth in the European Union and concluded that current demographic trends point to difficult times ahead for European economies in the following three areas: the size of the work forces, an ageing population and a greater demand for health care services.

Shrinking Work Forces

Today's babies are tomorrow's employees, as they will enter the work force upon reaching adulthood. Fewer births mean fewer workers in the years ahead to replace older, retiring workers. If low birth rates continue, a nation's work force becomes smaller. This has the potential of reducing productivity and a nation's total output.

The "Graying" of the Population

Low fertility, coupled with people living longer, means a growing proportion of elderly individuals. This threatens the solvency of pension and social insurance programs because of the growing number of recipients and the smaller number of workers paying into the system. Policy makers in the United States have voiced concerns about Social Security, fearing the system will go broke because of fewer workers paying into the system at a time when the post-World War II "baby boom" generation begins retiring and drawing benefits.

Growing Health Care Demands

As people grow older, their need for medical services increases. Health care costs have increased for years, posing significant financial burdens for businesses in the United States, where most health care plans are employer-funded, and for the nationalised health care systems in Europe. Low population growth increases the proportion of elderly people, meaning greater demand for expensive medical services.

Public Policy Responses

Governments in the European Union, already feeling some of the economic consequences of low population growth, have focused on the following policy responses: • Promoting more immigration of workers. • Encouraging young couples to have more children. • Reforming some social policies such as raising retirement ages and encouraging more women to enter the work force. The Rand study of the European Union found that immigration is not a feasible way of reversing the economic consequences of low population growth. It found that some national policies can raise fertility rates under the right circumstances. France, for example, has offered child care subsidies and rewarded families that have at least three children. Since instituting these policies, France now has Europe's second-highest fertility rate (Ireland is first). The Rand study cautioned, however, that varying social, cultural and political contexts mean that what works in one country will not necessarily work in another.

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